The current uncertainty relating to the coalition’s superannuation changes, which could take effect from July 1, 2017, if the legislation is passed, is putting professionals in a difficult situation when it comes to non-concessional super contributions.
There has been a continuing push from both sides of politics to try and ensure Commonwealth government funding and incentives do not go to above-average income earners. It is therefore understandable that limits should be placed on superannuation tax benefits for people in retirement.
Previous attempts in the form of reasonable benefit limits related more to increasing government revenue than making the superannuation system fairer. The $1.6 million account-based pension transfer limit is more generous than previous attempts to create reasonable benefit limits.
On the basis of a 5 per cent earning rate – and a single person requiring an annual income of $85,000 a year indexed at 3 per cent a year – $1.6 million would last just over 24 years. In scrapping the $500,000 lifetime non-concessional limit the Coalition has cleverly linked the super transfer limit to non-concessional super contributions.
In addition to reducing the annual limit from $180,000 to $100,000 from July 1, 2017 there will be an overarching limit that results in no non-concessional contributions being made once a person’s superannuation balance exceeds $1.6 million. The ability to bring forward two years of future non-concessional contributions has been retained.
Between a rock and a hard place
Because the super changes, including the reduction in the non-concessional contribution limits, have not yet been passed, and there is no guarantee they will ever be passed, advisers find themselves between a rock and a hard place when it comes to advising on non-concessional contributions.
The dilemma comes from advisers taking a conservative approach and recommending non-concessional contributions for the 2017 financial year be limited to the potential $380,000 limit; some clients could be disadvantaged if the legislation is not passed.
This $380,000 is made up of the $180,000 non-concessional contribution limit for the 2017 year and the $100,000 limits that may apply from July 1, 2017 using the two-year bring forward rule, if the legislation is passed. If the legislation is never passed the current limit of $540,000 would then apply.
Advising clients to only contribute the new $380,000 limit, who turn 65 during the 2017 financial year and would not pass the work test in the 2018 year, could seriously disadvantage them if the legislation is never passed, as they could not contribute the extra $160,000.
Non-concessional contribution makes sense
It therefore makes sense to recommend clients in this position to make a $540,000 non-concessional contribution under the current rules. If the legislation is passed, those clients would be required to withdraw $160,000 as it would be regarded as an excess non-concessional contribution.
The reasonable benefit limit has also been applied to defined benefit pensions that are often paid by untaxed funds. Under the current rules someone who is 60 or older and receives an untaxed super pension pays tax at their marginal rate, but receives a 10 per cent tax offset.
The $1.6 million limit will apply to defined benefit pensions by applying a multiple of 16 times to the amount received as an annual pension. This will result in the 10 per cent tax offset only applying to defined benefit pensions up to $100,000.
Where clients receive a defined benefit pension of less than $100,000 they can have account-based pensions that takes them up to the $1.6 million limit. For example a person who receives a defined benefit annual pension of $60,000 a year, which has a value using the 16 times multiple of $960,000, can have an account based pension of up to $640,000.
